Implications
The Dow Jones Equity ALL REIT Index is the subject of this article which tries to predict where the index will be in 2009. Although the WSJ reporter managed to assemble some of the truly "best and brightest" minds in the REIT industry for his article, he failed miserably when it came to asking them meaningful questions. Not one of these REIT owners or analysts commented on the coming barrage of bankruptcies or space reductions being discussed openly in trade journals by the major space users in almost all sectors of the REIT industry. For example, David Simon, CEO of the Simon Property Group and Steven Roth, CEO of Vornado Realty Trust, totally ignored the impact on 2009 FFO and NOI the previously announced closing of hundreds of anchor department or discount stores will have in their malls and/or shopping centers.
Analysis
Are these industry leaders "whistling by the graveyard"? While it is true that REIT stock prices are largely governed by prevailing interest rates and lots of cheap money constantly pushing real estate values upward, it is also true that the reason for this long term relationship between interest rates and stock prices is primarily due to the previously steady rate of increased earning or FFO these REITs have been producing.
It is my firm opinion that the 40% to 60% price reductions we saw in 2008 were the result of only the change in the availability of low cost loans. The real impact that will come from reductions in FFO and/or NOI resulting from the closing of millions of square feet of lead or "anchor" tenant spaces in the first half of 2009, will not be felt until the 3rd or 4th quarters.
This is precisely when the principals of the REITs interviewed for this article are predicting that a turnaround will be occurring. GLG readers should be advised to pay close attention to the coming announcements of the closing of offices, hotels, warehouses and retail spaces and begin planning what the "domino" effect will be on the rest of their owned REIT portfolios.
